When a purchase fails to close

When a buyer fails to close a real estate transaction and the seller is awarded damages, should the seller credit the deposit to the damages award or should the seller be allowed to keep it in addition to the award? The Court of Appeal dealt with this question in the Azzarello v. Shawqi decision.

The sellers listed their home for sale in March 2017 for $1,398,000 during a very “hot” real estate market in the Greater Toronto Area. Shawqi, the buyer, offered them $1,555,000. The Azzarellos accepted this offer and Shawqi paid a $75,000 deposit. Afterwards, the Azzarellos agreed to buy a new home. They arranged a bridge loan to complete that purchase as well as to conduct some renovations on the new home.

On the date set for closing, after receiving several extensions, Shawqi failed to close. The Azzarellos relisted the property and ultimately sold it for $1,280,000. The Azzarellos commenced an action against Shawqi for breach of the Agreement of Purchase and Sale (APS). This action was decided summarily (without a full trial) on a summary judgment motion. The motion judge awarded the Azzarellos $308,688.31 in damages, which consisted of the difference in price ($275,000) and the consequential losses incurred by the Azzarellos (cost of the staging, legal fees, carrying costs of the property and interest on the line of credit).

Importantly, the motion judge also allowed the Azzarellos to keep the deposit and not credit it to the damages award. In other words, the Azzarellos were awarded the total damages of $308,688.31 plus they kept the $75,000 deposit. Shawqi appealed.

The Court of Appeal found that the motion judge erred by holding that the deposit be forfeited and not credited to the Azzarellos’ damages.

The Court of Appeal started the discussion by outlining settled law on what happened to deposits under various circumstances:

  • If a real estate transaction was completed according to the terms of the APS, unless the parties contracted otherwise in the APS, the deposit would be credited to the purchase price;
  • If the sellers breached the APS, the deposit would be returned to the buyers; and
  • If the buyers beached the APS but the sellers suffered no loss, the buyers would forfeit the deposit, without proof of any damage suffered. If the buyers wanted to, they could ask a court for relief against the forfeiture of the deposit.

The circumstances of this case were that the buyer, Shawqi, breached the APS and the sellers, the Azzarellos, suffered a loss entitling them to damages. The law on this issue was not well settled.

The Court of Appeal held that the purpose of the deposit was to compensate the Azzarellos for the lost opportunity in having taken the property off the market as well as the loss in bargaining power resulting from the Azzarellos having revealed to the market the price at which they had been willing to sell. Thus, the Azzarellos were entitled to keep the deposit. The question was whether they were entitled to keep the deposit in addition to their damages award.

The Court of Appeal reviewed the standard terms of the APS signed by the parties and found that the only term mentioning the deposit was the provision stating that the deposit would be credited to the purchase price on completion of the transaction. From this, it could be inferred that the parties intended the deposit would be applied as a credit to the payment obligation owed by Shawqi to the Azzarellos, whether the transaction failed or not. Since Shawqi had already paid the Azzarellos $75,000 as the deposit, the Azzarellos had to credit this amount towards their total damages award of $308,688.31 so that in the end Shawqi owed the Azzarellos a total of $233,688.31.

Due to the standard wording used in the APS, the Azzarellos were not entitled to “double recover” by keeping the deposit in addition to their damages award.